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February 15, 2013

More Employers to Add Roth 401(k)s

As part of fiscal cliff compromise, new legislation makes it easier for investors to convert balances

Is a Roth right for employees? More employers apparently think so.

A new survey from the human resources firm Aon Hewitt reveals a rise in the Roth 401(k)’s popularity, with an increasing number of employers planning on adding it to their defined contribution plans in 2013. Surprisingly, the fiscal cliff might be the reason.

As part of the congressional compromise, new legislation makes it easier for investors to convert balances within their savings plan into Roth accounts.

"While employers have steadily been adopting Roth features in recent years, the new law, along with a better understanding of Roth by both participants and companies, will encourage more plan sponsors to add these options in the near term," Patti Balthazor Bjork, director of retirement research at Aon Hewitt, said in a statement.

Immediately following the passage of the American Taxpayer Relief Act of 2012—the so-called fiscal cliff deal—the firm conducted a survey of more than 300 individuals representing large U.S. employers to determine the prevalence of Roth accounts and employers' likely actions with respect to their plans over the next 12 months.

According to the findings, while almost half (49%) of respondents currently offer no Roth provisions, 29% of those that don't offer Roth are very or somewhat likely to add this feature in the next 12 months. Of those new adopters, more than three-quarters (76%) will add both Roth contribution and in-plan conversion features.

The survey also found that employers that already have a Roth contribution option are likely to allow employees to make in-plan conversions to Roth accounts. Of those respondents that currently allow Roth contributions but do not offer in-plan conversions, more than half (53%) are very or somewhat likely to add this feature in the next 12 months.

For companies that already allow Roth contributions and in-plan conversions, more than three-quarters (79%) are very or somewhat likely to expand the eligibility for in-plan conversions, allowing them for previously nondistributable amounts.

"The new rules open the door for employers to allow expanded in-plan conversions, but it's not a requirement," Bjork added. "However, it makes the Roth conversions more attractive for employees, so there will likely be increased interest and incentive for employers to offer them."

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